Monday, July 30, 2007

Eichengreen on Germany

Barry Eichengreen on the German economy's recent success is to be read in conjunction with the paper in the previous post and this earlier one comparing French and German export production. The warning that Eichengreen issues to Germany also applies to France, and the need to shift from manufacturing to product design focuses attention on the importance of university reform.

Labor Market Rigidities and Unemployment

A central contention of Sarkozy's proposed economic reforms is that high unemployment rates in France are due in part to labor-market rigidities, which can be remedied by measures intended to reduce regulatory frictions and allow more rapid adaptation to changing market conditions. But is there any evidence that this thesis is true? A new paper by Lucio Baccaro and Diego Rei addresses that question and finds that the answer is "not much."

Here is the abstract:

Abstract: The view that unemployment is caused by labor market rigidities and should be addressed through systematic institutional deregulation has gained broad currency and has been embraced by national and international policymaking agencies alike. It is unclear, however, whether there really is robust empirical support for such conclusions. This article engages in an econometric analysis comparing several estimators and specifications. It does not find much robust evidence either of labor market institutions direct effects on unemployment rate, or of a more indirect impact through the magnitude of adverse shocks. At the same time, we find little support for the opposite, proregulatory position as well: the estimates show a robust positive relationship between union density and unemployment rates; also, there is no robust evidence that the within-country variation of bargaining coordination is associated with lower unemployment (as frequently argued), nor is it clear that bargaining coordination moderates the impact of other institutions. All in all, restrictive monetary policies enacted from an independent central bank and other determinants of real interest rates appear to play a more important role in explaining unemployment than institutional factors.

Technical details from the paper:

Our preferred model ...estimates the direct effect of institutions with data averaged over five-year periods. It includes only one macroeconomic control, the interest rate, six institutional variables: employment protection, unionization rate, a measure of generosity of unemployment benefits, tax wedge, central bank independence, as well as wage coordination, and no interactions. Such a parsimonious model, which we consider both in levels and first differences, gives changes in labor market institutions a fair chance to explain changes in unemployment. Yet little support for the deregulatory view emerges from the analysis: not just employment protection, but also, and more surprisingly, the generosity of unemployment benefits and the size of the tax wedge do not seem to be associated with higher unemployment.

Economic Patriotism 3

In several previous posts I've taken up the theme of "economic patriotism," which might be defined as the notion that at times sovereign interests may insist that the market bend its knee to them. With the market ascendant in recent decades, economic patriots have tended to acquire a somewhat "retro" look, and it has been common to decry the defense of national economic interests as shortsighted and backward. Now we have a cautionary statement from an influential voice generally linked to the market side of the debate: Larry Summers, economist, former US Treasury Secretary, and former president (need I remind anyone?) of Harvard. Specifically, Summers worries about the rise of "sovereign wealth funds," that is, large amounts of cash and securities controlled by states but invested in the market. He writes:

The question is profound and goes to the nature of global capitalism. A signal event of the past quarter-century has been the sharp decline in the extent of direct state ownership of business as the private sector has taken ownership of what were once government-owned companies. Yet governments are now accumulating various kinds of stakes in what were once purely private companies through their cross-border investment activities.

Suddenly French-style economic patriotism is not looking quite so backward. Sarkozy may well derive some benefit for his eclectic approach to markets and globalization from this shifting of the winds.

Response to Mary on Identity

In a previous message, I presented Brice Hortefeux's remark about immigration as constitutive of the French national identity as a significant departure. In a comment to that message, Mary gives examples of similar statements by Raffarin in 2003 and 2004. Thank you for these examples, Mary. I would, however, note one difference between Raffarin's two statements and Hortefeux's. Raffarin is careful to insist on either "a single community" or "a shared idea of national identity." Hortefeux's characterization of immigration as "constitutive" of the national identity leaves open the question of whether assimilation is to erase all trace of origins; it is more tolerant, as is Sarkozy, I believe, of a "communitarian" understanding of identity.

Mary goes on to say this:

There are countless more examples of this type from the CNHI project. Rather than seeing Hortefeux's discourse as anything new I would be more inclined to situate it in the context of an attempt to differentiate the 'good' immigrants of the past who have 'integrated' from today's 'bad' migrants, making it easier to sever any sort of link between the two and thus secure maximum support for a populist, repressive agenda.

One can indeed cite any number of statements by Sarkozy differentiating "successful" "immigrants" from unsuccessful ones, and he often uses his cabinet members with immigrant backgrounds as examples of such success. I agree that this is an unfortunate rhetorical choice, which obscures the impediments to "success" and places the onus on individuals. You may be right about the ulterior motive, and your view certainly reflects the pre-election conventional wisdom about the kind of government Sarkozy would run if elected--a conventional wisdom I shared. The reason I cited Hortefeux's remark is that it seemed to me to make concrete my sense that, since the election, Sarkozy has sought to soft-pedal the repressive theme. There has always been an "other Sarkozy," a Sarkozy interested in intercommunal dialogue and, I would suggest, more tolerant than many others of ethnic, religious, and cultural difference. He brings one other advantage to the table compared with a good many other politicians: he doesn't assume that the problems associated with immigration will solve themselves if not discussed in public or if drowned out by paeans to the Third Republic and its mystical assimilative virtues (not unlike the "dormitive virtue" extolled by Molière's doctors). I may be wrong in interpreting the positive signs--and I persist in regarding Hortefeux's statement as an advance--but I think it's premature, to say the least, to draw the conclusion that the intention of the new ministry is purely repressive.

I might add that we also focus on different parts of the speech Sarkozy gave in Sénégal. I emphasized his condemnation of colonialism and characterized the speech as "well-crafted," whereas Mary, in her blog, cites his patronizing comments about la pensée sauvage as little more than a throwback to colonial attitudes. She is right, I think, in her comments about this aspect of his speech. This embrace of paradox is increasingly characteristic of Sarkozy. Only time will tell whether it represents a real complexity of policy or merely an untenable rhetorical bridge between incompatible positions.